Case: 1:19-cv-01339 Document #: 179 Filed: 01/06/20 Page 1 of 211 PageID #:3648 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS UNION ASSET MANAGEMENT HOLDING Case No. 1:19-cv-01339 AG and SJUNDE AP-FONDEN, Individually, and on Behalf of All Others Similarly Situated, Honorable Robert M. Dow Jr. Plaintiffs, v. THE KRAFT HEINZ COMPANY, 3G CAPITAL PARTNERS, 3G CAPITAL, INC., 3G GLOBAL FOOD HOLDINGS, L.P., 3G GLOBAL FOOD HOLDINGS GP LP, 3G CAPITAL PARTNERS LP, 3G CAPITAL PARTNERS II LP, 3G CAPITAL PARTNERS LTD., BERNARDO HEES, PAULO BASILIO, DAVID KNOPF, ALEXANDRE BEHRING, GEORGE ZOGHBI, and RAFAEL OLIVEIRA, Defendants. CONSOLIDATED CLASS ACTION COMPLAINT Case: 1:19-cv-01339 Document #: 179 Filed: 01/06/20 Page 2 of 211 PageID #:3648 TABLE OF CONTENTS I. PRELIMINARY STATEMENT ............................................................................................ 1 II. JURISDICTION AND VENUE ........................................................................................... 12 III. PARTIES .............................................................................................................................. 12 A. Plaintiffs ................................................................................................................ 12 B. Defendants ............................................................................................................ 13 IV. SUMMARY OF THE FRAUD ............................................................................................ 15 A. Background On The Merger ................................................................................. 15 B. Defendants Understood That In Order For The Market To View The Kraft Heinz Merger As Successful, The Company Would Have To Promise Sustainable Cost Savings And Brand Investment To Drive Long-Term Growth .................................................................................................................. 18 C. From The Beginning Of The Class Period, Defendants Falsely Assured Investors That Kraft Heinz Was Implementing Sustainable Cost Cuts And Investing Significantly In Its Brands .................................................................... 21 D. Unbeknownst To Investors, Kraft Heinz Implemented Destructive, Unsustainable Cost-Cutting Measures .................................................................. 25 1. Contrary To Defendants’ Public Statements, Kraft Heinz Implemented Unsustainable Cost-Cutting Measures That Severely Impaired The Company’s Operations And Damaged Its Brands ............. 27 a. Cost Cuts To Kraft Heinz’s Core Supply Chain Functions, Which Began Immediately After The Merger, Caused Massive Disruptions In Customer Fulfillment .............................. 31 (1) Elimination Of Maintenance And Product Quality Functions. .......................................................................... 32 (2) Indiscriminate Layoffs ...................................................... 35 (3) Third-Party Supplier And Vendor Functions .................... 39 (4) Failure To Integrate SAP .................................................. 43 (5) Facility Closures ............................................................... 45 i Case: 1:19-cv-01339 Document #: 179 Filed: 01/06/20 Page 3 of 211 PageID #:3648 (6) Longstanding Supply Chain Issues Materially Impacted Kraft Heinz’s Supply Chain Performance And Service Levels Beginning Immediately After The Merger........................................................................ 47 b. Cost Cuts To Kraft Heinz’s Core Brand Support Function Led To Lost Revenue, Distribution, And Pricing Power .............. 51 (1) Cuts To Kraft Heinz’s R&D ............................................. 52 (2) Cuts To Kraft Heinz’s Product Quality ............................ 54 (3) Cuts To Kraft Heinz’s Salesforce ..................................... 56 (4) Cuts To Kraft Heinz’s Marketing ..................................... 57 c. Kraft Heinz’s Incentive Structure Further Fueled These Destructive Cuts ............................................................................ 60 2. Kraft Heinz’s Cuts To Operations And Brand Equity Support Soured Its Relationships With Its Retail Customers, Including Walmart, And Impacted Revenue ............................................................. 62 3. Kraft Heinz Ramped Up Its Fraud Following Kraft Heinz’s Failed Bid To Acquire Unilever Amid Declining Sales ...................................... 65 4. At The Same Time, Kraft Heinz’s Cost-Cutting Practices Led To A Steep Decline In The Company’s Canadian Retail Business ................... 72 5. The Company’s Executives Knew About The Range Of Destructive Cost-Cutting Practices And That The Cost Cuts Were Not Limited To “Synergies” .......................................................................................... 78 6. To Further Create The Illusion Of Sustainable Cost-Cutting, Kraft Heinz Engaged In Accounting Fraud ........................................................ 81 a. Kraft Heinz Improperly Delayed Reporting Mandated Impairments Of Its Intangible Assets ........................................... 81 b. Background To The $15.4 Billion Impairments: The Merger And Purchase Price Accounting ................................................... 82 c. Kraft Heinz Improperly Delayed Impairment Of Its Intangible Assets ........................................................................... 84 d. The Procurement Division Fraud .................................................. 87 ii Case: 1:19-cv-01339 Document #: 179 Filed: 01/06/20 Page 4 of 211 PageID #:3648 7. As Defendants Eventually Admitted, Kraft Heinz’s Internal Controls Over Financial Reporting Suffered From Material Weaknesses ............................................................................................... 89 a. Defendants’ Certifications Of Internal Controls Over Financial Reporting Were Material To Investors ......................... 89 b. Defendants’ Certifications Of Internal Controls Over Financial Reporting Were False .................................................... 91 E. While In Possession Of Material Non-Public Information And Just Prior To The Collapse Of Kraft Heinz’s Stock Price, 3G Capital Reaped More Than A Billion Dollars From The Sale Of Kraft Heinz Stock ....................................... 93 F. The Truth Emerges ............................................................................................... 94 1. Kraft Heinz Announced Declining Earnings And Margins Driven By “One-Off” Events: A Failure To Achieve Cost Savings, Price Reductions, And Investments To Support The Company’s Brands ......... 94 2. Kraft Heinz Stunned Investors By Announcing $15.4 Billion In Intangible Impairment Charges And An SEC Investigation..................... 99 3. The Aftermath Of The Company’s Massive Impairment Announcement ........................................................................................ 104 4. Kraft Heinz Announced A Restatement Of Its Financials Since The Merger And A Broadened Investigation By The SEC............................ 106 5. Kraft Heinz Disclosed Material Weaknesses In Its Internal Controls Over Financial Reporting And A Department Of Justice Investigation ............................................................................................ 108 6. Kraft Heinz Disclosed Its Need To Reinvest Substantially In Its Brands And Operations To Remain Competitive ................................... 111 G. Post-Class Period Developments ........................................................................ 114 V. ADDITIONAL ALLEGATIONS THAT DEFENDANTS KNOWINGLY OR RECKLESSLY MISLED INVESTORS REGARDING KRAFT HEINZ’S TRUE FINANCIAL CONDITION ............................................................................................ 114 VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS ......................................................................................................... 125 A. Defendants’ False And Misleading Statements Concerning Kraft Heinz’s Cost-Cutting Measures And Investments In The Company’s Brands, Infrastructure, And Operations ........................................................................... 126 iii Case: 1:19-cv-01339 Document #: 179 Filed: 01/06/20 Page 5 of 211 PageID #:3648 1. Defendants’ False And Misleading Statements During 2015 ................. 126 a. Misstatements Concerning The Character Of Kraft Heinz’s Cost Savings And The Impact Of Cost-Cutting Efforts ............. 126 b. Misstatements Touting Defendants’ Investments In The Company’s Brands, Operations, And Infrastructure ................... 128 c. Market And Analyst Reaction To Defendants’ 2015 Misstatements ............................................................................. 129 2. Defendants’ False And Misleading Statements During 2016 ................. 129 a. Misstatements Concerning The Character Of Kraft Heinz’s Cost Savings Program And The Program’s Impact .................... 130 b. Misstatements Touting Defendants’ Investments In The Company’s Brands, Operations, And Infrastructure ................... 135 c. Market And Analyst Reaction To Defendants’ 2016 Misstatements ............................................................................. 138 3. Defendants’ False And Misleading Statements During 2017 ................. 139 a. Misstatements Concerning The Character Of Kraft Heinz’s Cost-Savings Program And The Program’s Impact.................... 140 b. Misstatements